Coming of age

Why in the News

Binance, the world’s largest cryptocurrency exchange, has suffered the biggest theft in its history, with $6.3 billion of assets stolen in a recent hack. Its quick recovery of users’ assets shows how far the crypto industry has matured, and weakens the case for India’s refusal to regulate the sector.

What is the SAFU, and how did it work?

1. Emergency fund: In 2018, Binance set up the Secure Asset Fund for Users (SAFU), an emergency fund working like an insurance pool for users after a hack or platform failure.
2. Funding source: Binance financed the fund from the trading fees it collects from users.
3. Recovery after the hack: The stolen assets exceeded the SAFU’s resources, so Binance added its own funds and restored about 95% of users’ assets within four days.
4. The takeaway: Because Binance had built a fee-funded reserve before the crisis, users got their assets back quickly, which shows the crypto space can be run responsibly.

Does the hack prove that crypto is unsafe?

1. Exchange no weaker than a bank: Binance was no more exposed to hackers than a bank is, so the hack does not show that crypto itself is unsafe.
2. Hacking across sectors: Cyberattacks are now a daily occurrence, and even small pharmaceutical companies fend off millions of attacks a month.
3. Perpetual contest: Hackers and security software developers are locked in a constant contest, so one attack among millions or billions will inevitably get through.
4. Lesson to draw: What matters for policy is how Binance prepared for and reacted to the attack, not the breach alone.

Is India’s view of crypto out of date?

1. Official stance: The Indian government and the Reserve Bank of India (RBI) still view private crypto as the “Wild West of techno-finance”, an unregulated and lawless space.
2. Industry practice now: Large crypto companies follow cautious financial safeguards (prudential practices), protect customers and cooperate with law enforcement agencies.
3. Comparable risk: Indians face no higher risk from cryptocurrencies than from fake stock market scams, and awareness is the best defence.
4. Risk and adoption: Crypto risks have fallen, and more people are adopting crypto.

Challenges

1. Regulatory refusal: India has refused to regulate the crypto space, so users and exchanges operate without a domestic rulebook.
2. Prohibitive taxation: Crypto is taxed at a prohibitive rate, which pushes Indians towards the black market, where scams proliferate, or towards foreign exchanges.
3. Unbacked assets: Policymakers fear that cryptocurrencies are not backed by any asset, so nothing underpins their value.
4. Unexplained breach: Binance must still find out how it was hacked and prevent a recurrence.

Way Forward

1. Regulate the industry: Frame a regulatory regime for crypto, drawing on the ample international legislation now available.
2. Stablecoins only, if backing is the worry: Consider allowing only stablecoins, which have real assets underpinning them.
3. Mandatory emergency fund: Require an industry-maintained emergency fund on the model of the SAFU.
4. Investor awareness: Build public awareness so that users can recognise and avoid crypto scams.

Conclusion

The Binance episode shows that a crypto exchange can absorb a major breach when it has planned for one, which weakens the case for leaving the sector unregulated. The open question is whether India will move from refusal to rules that bring crypto users back to regulated, domestic platforms.

Back2Basics: Stablecoin

1. What it is: A stablecoin is a cryptocurrency designed to keep a steady value by pegging it to a reference asset, usually a currency such as the US dollar.
2. How it stays stable: Its issuer holds reserves, such as cash or government securities, that back the tokens in circulation.
3. Examples: Tether (USDT) and USD Coin (USDC) are pegged to the US dollar.
4. Contrast with Bitcoin: Bitcoin has no backing asset, so its price rests entirely on market demand.

Matching Previous Year Question

“[2022] With reference to Non-Fungible Tokens (NFTs), consider the following statements : 1. They enable the digital representation of physical assets. 2. They are unique cryptographic tokens that exist on a blockchain. 3. They can be traded or exchanged at equivalency and therefore can be used as a medium of commercial transactions. Which of the statements given above are correct ? (a) 1 and 2 only (b) 2 and 3 only (c) 1 and 3 only ‘ (d) 1, 2 and 3 ANSWER: (a)”